A Summary of When Overreaching Class Action Settlements May Be Challenged After They Are Final
By Gerson H. Smoger, Ph.D.,
As mass tort cases are increasingly settled as part of class actions, the question arises as to the ability of the settlement to bind purported absent class members, particularly those who were unaware of being injured at the time of the settlement. This article summarizes some of the bases upon which a purported absent class member may seek to bring his or her individual action in a separate court by arguing that he or she was not properly before the settling court and , therefore, cannot bound by the judgment which was entered. (Of note in reading this article is the fact that the author argued many of these issues before the U.S. Supreme Court in the case of Dow v. Stephenson).
Procedurally, the class action judgment is a defense which the settling defendant will raise in a subsequent action. To date, the U.S. Supreme Court has consistently permitted absent class members to contest this defense of res judicata by challenging whether the individual plaintiff received due process, i.e.”notice plus an opportunity to participate in the litigation” as well as “an opportunity to remove himself from the class” and to be adequately represented “at all times”. Philips Petroleum Co. v. Shutts, 472 U.S. 797, 812, n. 24 (1985). This so-called “collateral review” is often the only opportunity for an absent class member to contest whether he or she was properly before the class court in the first place and subject to its judgment. The reviewing court must then evaluate all four of these basic rights as they apply to each individual who brings an independent action in order to determine whether the class court had jurisdiction over that individual in the first place. If the Plaintiff was previously denied any of these rights, then nothing could be made “final” as to that plaintiff, and, theoretically the judgment cannot properly bar that plaintiff’s suit. Stevenson v. Dow Chemical Co., 273 F.3rd 249 (2d Cir. 2001).
II. THE RIGHT OF ABSENTEES TO RAISE DUE PROCESS OBJECTIONS IN RESPONSE TO THE DEFENSE OF RES JUDICATA
In conducting a collateral review in Hansberry v. Lee, 311 U.S. 32, 42 (1940), the U.S. Supreme Court did not seek to prescribe “any particular rule for establishing the conclusiveness of judgments in class suits.”
Later, when Rule 23 was amended in 1966, the Advisory Committee explicitly preserved the right of absent class members to contest the validity of a judgment reached in a representative capacity: “[S]ubdivision (c)(3) does not disturb the recognized principle that the court conducting the action cannot predetermine the res judicata effect of the judgment; this can be tested only in a subsequent action.”
This right to seek collateral review was unanimously recognized by all of the commentators writing immediately after the Rule was written. Judge Frankel observed:
There are, of course, some obvious limitations in any case upon the extent to which absent parties will be concluded. * * * such parties have a clear right in some later litigation to attack the judgment which purports to bind them. In such later case, at least the basic consideration going to the fairness of holding them bound will be open for re-examination. Marvin E. Frankel, Some Preliminary Observations Concerning Civil Rule 23, 43 FRD, 39, 46 (1968), (emphasis supplied).
See also 3B Moores Federal Practice, § 23.60 (1987) (same); Wright & Miller Sec. 1789, pp. 246-46 (1986) (same); 3 Newberg on Class Actions (2d ed. 1985) Sec. 16.24 at p. 345 20.
Subsequently, the U.S. Supreme Court has on several occasions reaffirmed the rule that a class action court cannot control the res judicata effect of its own judgment. “[A]n absent class action plaintiff is not required to do anything (such as intervene to contest adequacy of representation before a judgment becomes final). He may sit back and allow the litigation to run its course, content in knowing that there are safeguards provided for his protection”. Philips Petroleum Co. v. Shutts, 472 U.S. 797, 810 (1985).
In Martin v. Wilks, 490 U.S. 755 (1989) the U.S. Supreme Court even held that a person who had notice and an opportunity to be heard in a class action lawsuit is not required to intervene and could seek review of the resultant consent decree collaterally. (See also 3B Moores Fed. Practice at § 23.60, pp. 23-444 n.14.)
III. CHALLENGES REGARDING THE ADEQUACY OF NOTICE
The Supreme Court has consistently maintained that “an elementary and fundamental requirement of due process in any proceeding which is to be accorded finality is notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.” Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314-15, (1950). In an action under Rule 23(b)(3), notice must also inform the absent class members of their opportunity to opt out.
A. Inadequate Dissemination of the Notice
The initial question that needs to be asked in evaluating the res judicata effect of a class action judgment is whether the notice that went out was sufficiently designed to reach the putative class members. Rule 23(c)(2) states:
In any class action maintained under subdivision (b)(3), the court shall direct to the members of the class the best notice practicable under the circumstances, including individual notice to all members who can be identified through reasonable effort. The notice shall advise each member that (A) the court will exclude the member from the class if the member so requests by a specified date; (B) the judgment, whether favorable or not, will include all members who do not request exclusion; and (C) any member who does not request exclusion may, if the member desires, enter an appearance through counsel.
However, what can be considered as “the best notice practicable” has varied greatly among courts. In the case of Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 157 (1974) the Supreme Court required personal notice to all of the class members despite the fact that the amount of damages at issue per class member was relatively small. Yet, in a large number of other cases various forms of publication, personal and broadcast notice have been approved. Any challenge, therefore, generally depends on a number of factors raised regarding the reasonableness of the notice at the time the original court approved it. However, given that there is much variability in notice mechanisms, this has proven to be the most frequent areas in which the conclusiveness of class action settlements have been challenged.
B. Failure of The Notice To Provide a Full Opportunity To Opt Out.
The second item of scrutiny goes to the actual text of the notice. At minimum, notice cannot bar an absent class member’s claims unless it fully informs the class member of the claims included in the class action, as well as the right to opt out. (See, e.g., Garcia v. Collins, 776 F.2d 841, 848 (4th Cir. 1984) (holding that despite a broadly plead complaint, notice was insufficient to state future claims would be barred); Twigg v. Sears Roebuck and Company, 153 F.3d 1222, 1227-1230 (11th Cir. 1998) ( the language of the notice has to be sufficient to inform the Claimant of the claims asserted) Penson v. Traveller Transport Company, 634 F.2d 989 (5th Cir. 1981) (notice did not inform absent class members of the right to opt out) Republic National Bank of Dallas v. Denson and Addison Company, 68 F.R.D. 208 (N.D. Texas 1975) (holding that notice should inform absent class members of possible conflicts of interest so that they can decide whether to withdraw from the class.); Morgan v. Ward, 699 F. Supp. 1025 (E.D.N.Y. 1988) (class members’ individual claim for damages not barred by class action, because he was not notified that membership in a civil rights prisoners’ class would foreclose individual actions for damages.) Further, notice “. . . must contain information that a reasonable person would consider to be material in making an informed, intelligent decision of whether to opt out or remain a member of the class and be bound by the final judgment.” In Re: Nissan Motor Corp. Anti-Trust Litigation, 552 F.2d 1088, 1105 (5th Cir. 1977).
C. There is a Question As To Whether Notice to Future Personal Injury Claimants Can Ever Be Constitutionally Adequate.
A number of courts in the 1980’s and 1990’s tried to deal with the issue of whether “future” claimants may ever be given adequate notice. For instance, in Payton v. Abbott Laboratories, 100 F.R.D. 336, 338 (D. Mass. 1983) a class was decertified which included future claimants because their claims were not yet cognizable. On the other hand, in In Re: Agent Orange Product Liability Litigation, 597 F. Supp. 740 (E.D.N.Y. 1984) future claimants were included within the terms of the class settlement. While not definitively deciding the issue, the U.S. Supreme Court in Amchem v. Windsor, 521 U.S. 591, 628 (1997) certainly indicated that effective notice requires knowledge of one’s stake in the outcome of a given litigation:
Many persons in the exposure-only category, the Court of Appeals stressed, may not even know of their exposure, or realize the extent of the harm that may incur. Even if they fully appreciate the significance of the class notice, those without current afflictions may not have the information or foresight needed to decide, intelligently, whether to stay in or opt out.
IV. CHALLENGES REGARDING ADEQUACY OF REPRESENTATION
The Restatement of Judgments at § 42(1) holds that “a person is not bound by a judgment for or against the party who purports to represent him if either “(d) * * * there was a substantial diversion of interest” or “(e) the representative failed to prosecute or defend the action with due diligence and reasonable prudence, and the opposing party was on notice of facts making that failure apparent.” If “there is in fact a substantial divergence of interest between [the representative and some members of the class] * * * the judgment is not binding on those whose interests are divergent.” Id., Comment e.
A. Adequate Representation Requires a Substantial Alignment of Interests
The U.S. Supreme Court has generally held that due process requires that there be an alignment of interest between any “virtual representatives” and individual absent class members they seek to represent. Hansberry v. Lee, 311 U.S. 32 at 45 (1940) Indeed, after the Court’s decision in Hansberry, Rule 23(a)(4) was amended to strengthen the specific protection for absent class members. One seeking to challenging the binding affect of a class action judgment under on this basis must make an assessment as to whether there was indeed a sufficient alignment between the selected class representatives and those the settling Defendant sought to have bound by the settlement. See, for example, Martin v. Wilks, 490 U.S. 755 (1989).
B. The Class Must be Adequately Represented At All Times
The structure of Rule 23 also dictates that the initial court’s decision on adequacy cannot be immune from challenge. Rule 23 only requires the court to formally consider adequacy once — in deciding whether to certify the class at all — and this is to be done “as soon as practicable after commencement of (the) action”. Rule 23(c)(1). A court’s determination, under Rule 23(a)(4) is, therefore, not a conclusion, but a prediction. The court merely anticipates that the chosen “representative parties will fairly and adequately protect the interest of the class,” while adequacy itself must be maintained “at all times.”
As Judge Mehrige stated, a district judge cannot be expected to: “foresee all the potential claims that may be raised by class members in contesting the adequacy of the class representatives and resolve them, perhaps without specifically pointed argument, in a favorable manner.” Lewis v. Philip Morris Inc., 419 F. Supp. 345, 352 (E.D. Va. 1976), vacated on other grounds, Lewis v. Tobacco Workers’ Intern. Union, 577 F.2d 1135 (4th Cir. 1978), cert. denied, 439 U.S. 1089 (1979). Thus, because due process requires adequate representation “at all times,” any single determination of adequacy is inherently tentative. It cannot anticipate whether the representation will be adequate after appeals are exhausted or after the determination of settlement fairness if there are no appeals:
Courts then have a duty to thoroughly and scrupulously examine the actions of class representatives at every stage of the proceeding in order to make sure they have provided adequate representation for absent class members. See Guerine v. J&W Investment Company, 544 F.2d 863 (5th Cir. 1977). Thus, adequacy of representation is required: during discovery, pre-trial, and trial, see Johnson v. Shreveport Garment Company, 422 F. Supp. 526 (W.D. LA 1976)); post trial modifications of court orders, Crawford v. Honig, 37 F.3d 485, 488 (9th Cir 1994) the award of attorneys fees (National Association of Regional Medical Program, Inc. v. Matthews, 551 F.2d 340 (D.C. Cir. 1976) and the failure to appeal (Gonzalez v. Cassidy, 474 F.2d 67 (5th Cir. 1973)). In sum, as the U.S. Supreme Court has stated, due process requires adequate representation “at all times.” Shutts, 472 U.S. at 812 (1985).
C. It Is Difficult To Show The Requisite Alignment Of The Interest In The Case Of “Futures”
As early as In In Re: Bendectin Products Liability Litigation, 749 F.2d 300, 304 n.8 (6th Cir. 1984) the Sixth Circuit held in response to a class including “futures” being certified that the same counsel could not represent both present and future claimants because both groups “are inherently in conflict with each other for their share of the settlement.” Therefore, the court found that the present subclass “had the incentive to try to minimize the size of the [future subclass] in order to increase [their] share of the settlement.” On the other hand, both the District court and the 2nd Circuit allowed such a settlement to take place in In Re: Agent Orange Product Liability Litigation, 597 F. Supp. 740 (E.D.N.Y. 1984); Ivy v. Diamond Shamrock, 901 F. 2nd 7 (1993).
In the case of Amchem, 521 U.S.591, 626-27 (1997) the U.S. Supreme Court finally opined on this obvious conflicts:In significant respects, the interest of those within the single class are not aligned. Most saliently, for the presently injured, the critical goal is generous immediate payments. That goal tugs against the interest of exposure-only plaintiffs in ensuring ample, inflation-protected funds for the future.
The Supreme Court therefore concluded that a class action settlement could not bind absent class members unless each of the subgroups with divergent interests — most notably present claimants versus future claimants — was represented by members of that distinct subgroup who would protect the interests of that subgroup only:
The class representatives may well have thought that the Settlement serves the aggregate interests of the entire class. But the adversity among subgroups requires that the members of each subgroup cannot be bound to a settlement except by consents given by those who understand that their role is to represent solely the members of their respective subgroups.
Id. (citations omitted) (emphasis added). Under Amchem, a settlement on behalf of both currently-injured and exposure-only plaintiffs reached by currently-injured plaintiffs cannot be binding on persons who at the time of settlement had not yet manifested injury.
This holding, which expressly followed the intent of the framers of Federal Rule 23, as amended in 1966, was reaffirmed by the U.S. Supreme court in Ortiz v. Fibreboard, 527 U.S. 815, 845-856 (1999):
[I]t is obvious that a class divided between holders of present and future claims (some of the latter involving no physical injury . . .) requires division into homogeneous subclasses under Rule 23(c)(4)(b), with separate representation to eliminate conflicting interests of counsel. See 527 U.S. at 854-56.
V. RELEASING UNACCRUED “FUTURE” CLAIMS MAY VIOLATE ARTICLE III AND DEPRIVE PLAINTIFFS OF VALUABLE STATE LAW PROPERTY RIGHTS
Under the Rules Enabling Act, a Federal Rule may not “abridge, enlarge, or modify any substantive right.” 28 U.S.C. § 2072(b). Rule 23 does not change the substantive law of res judicata, which only precludes claims that were litigated or could have been litigated in the prior action. Heiser v. Woodruff, 327 U.S. 726, 735 (1946).
Generally, “future” claims could not have been individually litigated in the prior settling action. This is because these claims by had yet to accrue in most jurisdictions. (See, for example, Ayers v. Jackson Township, 106 N.J. 557, 583, 561 A.2d 287, 300 (1987) (holding in New Jersey that claim preclusion cannot apply, because the claim could not have been joined with earlier claims, such as property damage; or medical monitoring, as it did not accrue until the disease manifested.) Breaux v. Mine Safety Appliances Co., 717 So.2d 1255 (Lo. App. 5th Cir. 1998) (holding in Louisiana that an asbestos victim who had released his exposure claim was not barred from pursuing a claim for mesothelioma resulting from same exposure, even though the exposure claim had been settled years before). Cole v. Celotex, supra 599 So.2d 1058, 1086 (1992) (Dennis J. concurring)). See also National Super Spuds, Inc. v. New York Mercantile Exchange, 660 F.2d 9, 18 (2d Cir. 1981) (Friendly, J.) If a judgment after a trial still cannot extinguish state law claims, the question raised is whether a judgment approving a settlement that has been entered in a representative capacity should be able to do so. Id. This is especially so when the class representatives themselves did not assert the claims which they agreed to extinguish. Id.
The U.S. Supreme Court has failed to address this issue specifically. Nevertheless, it has established guidelines for when a “case” or “controversy” may exist pursuant to Article III. In Lujan v. Defenders of Wildlife, 504 U.S. 555 (1992) the Court established an “irreducible constitutional minimum of standing” which requires that “the plaintiff must have suffered an ‘injury in fact’ – an invasion of a legally-protected interest which is (a) concrete and particularized, and (b) ‘actual or imminent, not conjectural or hypothetical.’” (Citing Warth v. Seldin, 422 U.S. 490, 508 (1975) and others.) In contrast, potential “future” injuries are not “concrete” in either a “qualitative [or] temporal sense,” Whitmore v. Arkansas, 495 U.S. 149, 155 (1990), nor can they be known to be “imminent.” Lujan, 504 U.S. at 560. To be “imminent,” there must be a sufficient degree of certainty that the injury will exist in the future to eliminate the possibility the court will decide “a case in which no injury will have occurred at all.” Id. at 564 n.2. On these bases, a very compelling argument can be made that a settling court was not empowered to settled the speculative claims of “future” victims.
VI. DEFENDANTS’ LIKELY ARGUMENT THAT THE NEED FOR “FINALITY” OVERRIDES DUE PROCESS VIOLATIONS HAS GENERALLY BEEN REJECTED
Inevitably, in response to a due process challenge, the settling Defendant will espouse the virtues of “finality” as a reason for diminished scrutiny of due process violations. However, as has been written by Professor Hazard:
[I]t is probably impossible to guarantee prospectively the conclusive effect of a class suit judgment. However, that is not really a serious objection to the class suit procedure * * * A litigant always remains free to say there was no actual service of process or that due process was invalid in some respect or that the proceeding was invalidated by fraud, and so on. G. Hazard, J. Gedid and S. Sowle, Historical Analysis of the Binding effect of Class Suits, 146 U of Pa. L. Reb. 1849 (1998).
That the desired goal of finality does not permit representatives with present interests to abridge the due process rights of “futures” was first decided by the Supreme Court well over a century ago. In McArthur v. Scott, 113 U.S. 343 (1985), the question was whether present claimants could bind future, unborn heirs through “virtual representation.” The present claimants, who were successful in the original action, relied upon that success in distributing and selling the property in question. Id. at 392. Notwithstanding immensely important judicial policies favoring finality in real estate transactions, the Supreme Court held that the judgment was not binding on the grandchildren when they brought suit thirty years later:
To extend the doctrine of constructive and virtual representation, adopted by courts of equity on considerations of sound policy and practical necessity, to a decree like this, in which it is apparent that there was no real representation of the interests of these plaintiffs, would be to confess that the court is powerless to do justice to suitors who have never before had a hearing. Id. at 404.
To protect the absent class members who had no representation, the Court held that the post-judgment partition of the land among the heirs at law, and their conveyances to third persons for valuable consideration, could not affect the title of the grandchildren, who were allowed to retake the properties over the claims of subsequent purchasers.
Similarly, in Hansberry, the Supreme Court reiterated the principle that finality of judgments, no matter how desirable, must be subordinate to due process of law, reversing the Supreme Court of Illinois which had valued finality more highly.
(See Lee v. Hansberry, 372 Ill. 369, 24 N.E.2d 37, 39).
While settling Defendants seek to have their class action settlements interpreted as broadly as possible, there are a number of bases upon which putative absent class members may challenge these settlements in collateral proceedings if they desire to bring independent litigation . While such challenges rarely take place, challenging settlements in order to bring an individual lawsuit presents a valuable mechanism with which to prevent overreaching class action settlements from abridging the rights of innocent victims.
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